How Facebook failed its users and its shareholders

Nothing in modern business history illustrates the importance of relational capital – or the vulnerability of corporate reputations generally – as the recent collapse in the Facebook share price.

In a single day, Facebook (FB) lost nearly US$120 billion of market capitalization. This represents the biggest one-day fall of a major public company in history.

The market shock was so extraordinary that some frustrated Facebook investors (who have been riding a share price rocket) are suing the company and its chief executives. Apparently these shareholders felt they were misled and should have been warned ahead of the public announcement (isn’t that insider trading?).

Ironically, the under-appreciated truth is that Facebook management is protecting their shareholders’ longer-term interests by preserving their primary asset – the relational equity the company has with their 2.5 billion Facebook users, who are growing more and more concerned about the company’s privacy policy and how it might affect their personal data.

In the words of BTIG analyst Rich Greenfield, “Facebook is actively choosing to make less money, deprioritizing near-term monetization to drive engagement to even higher levels to capture even more of their 2.5 billion monthly users’ time and attention.”

Regrettably, Facebook senior management seemed to have had no idea their reputation was vulnerable to this kind of catastrophic threat. The truth is, Facebook had no way of determining how the company’s actions might affect (positively or negatively) the commercial value of their user base.

Simply put, Facebook management, like many others, didn’t recognize their corporate reputation as a formal asset, and therefore didn’t have in place proper asset management strategies or risk management protocols.

Admittedly, even seasoned financial accountants don’t recognize these kinds of value drivers as legitimate assets. So it’s no surprise that managers are left in the dark.

But clearly, given the extraordinary collapses experienced lately by Weinstein Co, Facebook, Twitter and others, we have to admit the business landscape has changed, profoundly. Corporate reputations are not only valuable assets, but in the socially-connected world, they’re also poised perilously and need serious risk management strategies.

So what tools are available to begin treating corporate reputation like a formal intangible asset?

To begin with, the economy has changed. The most obvious transformation is in capitalism’s engine of growth. Technology has created a vast networked marketplace, which is driving new business models with new value creation instruments.

Whereas the old industrial economy was factory-based and mechanical, today’s digital economy employs powerful new value drivers like human and intellectual capital. And it’s driven by the rise of the networked world, something specialists are calling social and relational capital.

As Facebook has demonstrated, sound business management involves mastering new approaches for building network power by mixing and combining complex new capital forms to create different kinds of value with vastly different (management grade) intangible assets.

Perhaps the most difficult form of intangible capital for many to understand is relational capital. Of course, corporate reputations have been important to business for a long time, but accountants generally ignore these valuable assets or categorize them as good will, which is not very well understood.

The difficulties with reputation start with the accounting definition of an asset, which is “something you own from which you expect future benefits.” This is a pretty broad definition but, in terms of reputation, it presents a problem because it’s difficult to demonstrate ownership in these circumstances.

A solid corporate reputation is a function of the trust or the equity a company has with a host of key stakeholders, including employees, customers and suppliers (direct or indirect), regulatory authorities and, not least, the public at large.

Given that a company can’t technically own its key stakeholders, where’s the asset?

The truth is the asset is in the relationship between the various stakeholders and the company, which the company can – definitely – take ownership of.

Facebook’s biggest asset was its user network. It was the failure to properly measure, monitor and manage this intangible asset that led to Facebook’s intrusive data exploitation, which triggered unrealistic investor expectations that – when modified – led to the collapse in share price.

Identifying the intangible assets that support reputational value is becoming a must-have core competency for the most successful companies. Failure to do so is no excuse.

Markets are fragile, anticipating disruption, and as such are unforgiving of those who don’t formally protect the most important intangible asset in a business: its reputation.